ValuePickr Forum

Ambika Cotton Mills

I have read the article. Nothing negative about it.

Hi tellpalani,

thanks for the link…a small article…From what I understood, their business performance is good…But the issue is PE…According to them Ambika stays in mid single digit and occasionally goes up to low double digits on PE…It was trading at 13 PE in 2018 and has come down to 8.56 now…

Attached is the working capital cycle for Ambika from 2005-2019

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In 2019, the working capital cycle increased to 202 days. In 2019, short term working capital borrowings amounted to ~89 crores. As per the Crisil report they have utilized 18% of the 455 crore working capital limits.

As per my estimates, working capital requirements should be at least 200-250 crores based on the operating cycle. Shouldn’t they have utilized more ? 18% utilization seems a bit less to me to fund the current working capital requirement.

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Cotton yarn prices are rising since last 45 days now up around 10%,also margin is improving for most of cotton yarn spinner

Any idea why the WC intensity reduced in the interim. Could you share the chart with dso, dpo, dio separately. If possible please share the excel also. Could they be funding the WC increase with internal accruals?

PS: Seems like the reduction in WC in 12-13 was due to reduction in inventory, I am guessing it was due to a fall in cotton prices. But it was an almost 50% fall in total value. It was the same year when OPM fell from 30% to 20%. In 2011 OPM spike from 20% to 30%. I am guessing this is due to FIFO inventory accounting and delay in passing on higher/lower RM prices to the customers.

I haven’t studied all the past ARs but does anyone know how they maintain such low DSO. Someone in a blog said they were using receivables discounting. Has anyone found any proof to substantiate this theory? Normally I avoid such companies with wild movements in WC days. But I guess it might be the nature of this industry.

If you look at the B/S from Mar-08, there has been 400 cr odd addition in equity reserves, 260 odd cr reduction in borrowings. 175 cr has gone into funding WC.

The PAT and CFO generation in the past years (10-19) of about 440 cr & 576 cr respectively, which has funded this expansion in B/S. Unfortunately, none of this has lead to a meaningful increase in excess capital for the shareholders in the form of investments or cash on the B/S. Company has paid dividends of 61.5 cr since 2008.

Fixed assets have remained approximately the same since 2008, while sales in the same period have gone 4.2x. That is some crazy utilization of assets. Do they outsource some of their production?

If the same cash flow generation trend continues, we could see some build up FCF from here on as the debt has reduced now but further increase in WC intensity could reduce FCF. Also, I do not know how much further they can grow without investing in PPE in fixed assets. That could also lower FCF.

PSS: Just as I posted this I saw your post below. Thank you for sharing the segmented WC charts.

As far as i can tell, Ambika funded its significant working capital requirements through cash generation (before WC adj) of 123cr + 89cr WC borrowing =212 cr, which is roughly what it needs. I still think 18% utilization is less as the co paid cash interest of 9.42cr and Cash taxes of 29.33 cr adding to ~39 cr. I dont track Ambika as closely as other members of this thread so cant comment on why WC intensity reduced but i think maybe it had something to do with Ambika expanding its speciality cotton yarn capacities. If i remember correctly, it expanded its capacities to manufacture speciality cotton yarn in 2010 or thereabouts in response to better demand before becoming a pure speciality cotton yarn player.

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For WC calculation one can refer to my post where i have uploaded the sheet

Best
Bheeshma

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Annual Report of 2017-18 says “Generally the sales are made against specific orders and to those customers who have long term relationship. Export Sales are backed by irrevocable letter of credits. In respect of domestic sales advance payments are collected before delivery of goods. However exceptions are made based on the credit quality of customers”.

Mr. Chandran mentioned in that year’s AGM (which I attended) that “export bills are discounted with banks and cash is parked in cotton”.

Figures for Export Bills discounted will be available in Annual Report under Contingent Liabilities.

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I was trying to understand the knitted fabric segment of company. On a high level, it looks that there are two methods of converting yarn to fabric. Weaving and knitting. Anything woven is not stretchable (imagine your 100% cotton shirt) and knitted is stretchable (like socks or sweater). But the problem with pure cotton knitted fabric is it gets stretched but does not come back to its normal form. Here comes Lycra and Modal. These are synthetic fibre, having very high stretchability. A 10% blend of Lycra to cotton can increase cloth’s stretchability by two times without deformation. Lycra mixed cotton facric is used mainly in underwears, waistbands of sweatpants, lounge wear, or any other types of underwear or bottoms that are designed to be stretchy, sports wear, swim wear. It is noticeable that expenses towards Modal: 10 Cr (2 Cr) and Lycra: 6 Cr (3 Cr) have increased significantly in 2018-19 as compared to past. The story about they selling fabrics to Jockey makes sense as this fabric is used for inner wears. Google search shows the price of Lycra cotton fabric to be Rs 450 per kg. Need to dig further deeper why the lycra cotton produced by Ambika is better than others?

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Cotton prices are headed for the worst week in 4 months, probably due to corona virus related fears.

Ambika holds almost 75% of the marketcap in cotton inventory. I believe that’s a significant risk .

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While I can understand your concern, I have a slightly different view point.

The management likes to keep a high stock of raw materials. They have acknowledged this on their website itself.


This seem to be a part of their strategy.

IMO, their focus is selling cotton yarn, not the cotton itself. So lets say if the price of cotton increases suddenly, they will still have enough cushion. I would be really worried if this was finished goods instead of raw cotton.

As we can see, the cotton prices have been dropping since July 2018. IMO, the management acted accordingly.

Thoughts/comments welcome.

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Flattish result from ambika.

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This quarter result was very pivotal to see how much new capex which was planned to be completed in August would incrementally contribute to the topline and bottom-line.

Despite being fundamentally strong company, the growth has remained a concern. As such there is no mention of any capex completion in the footnote (which usually they do) keeps us doubtful if numbers are post capex or not.

Plus future growth drivers seems to missing currently. This looks like a ideal value stock but definitely not a growth stock in near future in my view.

Disclosure: No transaction in last few months. My views may change and can decide to buy/sell without any notice.

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I have observed that the OPM and NPM have remained stable. In fact, improved slightly. When I compared these figures to one of the peers, Nitin Spinners, I have observed that these figures deteriorated.

One simple comparison might not be sufficient, so I will continue to compare the results of other companies that derive most of their revenue from cotton yarn. If the entire industry is under stress and still AC Mills has managed to improve the margins, then it’s a good sign.

I wanted to have more clear communication from the management. But I am of the opinion that the management has always been this way (although I haven’t been following the company for very long). Even the discussion in the annual reports seems to be a copy paste of the previous years. So I wouldn’t worry a lot about the communication part.

I would love to see what is the opinion of the other fellow members. It will only add to the collective wisdom.

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Hi,

Can the Coronavirous spread spell more trouble for Ambika Cotton Mills?
As their premium business of Cotton yarn which mainly gets exported to Asia and Europe can face demand issues.Again the worst affected area is China,which is kindly under lock down.Now the virus has also spread to Europe.

Disclaimer -> 5% of my portfolio is ACM

Thanks,
Deb

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The cotton futures have dropped 17% in last 10 days.
Given that the company carries ~75% of it’s market cap as inventory, will it have to write down inventory?

Less people going out for shopping on account of coronavirus will continue to impact demand and new orders.

They have fixed price contracts for yarn. And Yarn prices are not as volatile as cotton.

Yes yarn prices may not vary but demand may be sluggish.I am having no idea regarding their customers.but I feel demand might be impacted due to cornovirous.

Thanks,
Deb

Has the management given any sales target here?

Huge inventory could be a risk specially if the demand is slow. Several countries are in lockdown and the economy as a whole is going to suffer.

Having said that, the average of last 10 (2010-2019) years of sale/inventory ratio is 2.98. And that of 2019 is 2.41. Whereas the same figure for first five years (2010-2014) is 3.20. This means that they had more inventory compared to sales in the first five years compared to the recent years and the ratio for 2019 is even less than the last 10 years average.

Its not that the inventory is gone out of proportion recently. Also, the majority of the inventory is raw cotton and not finished goods. This gives a bit of comfort to me.

I am of the opinion that this might prove as an advantage because they can readily use the raw cotton whenever the demand picks up without needing more WC or facing any delays. Not sure how right or wrong am I on this. There could be downside of this which I might be missing.

But yes, the concern of slowdown is real. It will be a challenge for many businesses to navigate through these tough times. Only time will tell. IMO the sales will definitely suffer.

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@Donald, can you please point out how we analyze these things ?